2.7 Role of Government

Question 1

reasons why governments want to intervene in markets

Answer 1

To earn government revenue
To support firms
To support households on low incomes
To influence the level of production
To influence the level of consumption
To correct market failure
To promote equity

Question 2

Main forms of government intervening in the market

Answer 2

price ceiling
price floor
indirect taxes
subsidy

Question 3

What are price controls

Answer 3

The setting of minimum or maximum prices by the goverment

Question 4

aims of a price ceiling

Answer 4

increase consumption of the good or service.
reduce the price of certain goods or services for low-income consumers.
prevent exploitation by monopolies

Question 5

common situations where maximum price controls are used to ensure the availability of:

Answer 5

low-cost food for low-income earners.
affordable housing for low-income families.

Question 6

price ceiling may produce several consequences

Answer 6

It produces shortages.
It generates a rationing problem.
It promotes the creation of parallel (black) markets.
It eliminates allocative efficiency and generates welfare loss.
There are consequences for market stakeholders.

Question 7

What is a price ceiling and draw the graph

Answer 7

Is a maximum price set below the equilibrium price, in order to make goods more affordable to people on low incomes

Question 8

shortages

Answer 8

not enough of the good being supplied

Question 9

non-price rationing

Answer 9

once shortages occur price mechanism no longer achieves its rationing function, so non-price rationing methods occur e.x waiting in line, favoritism

Question 10

underground markets

Answer 10

illegally selling good above legal maximum as since shortages are present consumers are willing to pay more to get it

Question 11

under allocation of resources and allocative inefficiency

Answer 11

not enough resources are allocated to production of the good, society is worse off due to underallocation and allocative inefficiency

Question 12

negative welfare impacts

Answer 12

MB > MC, creating welfare los and allocative inefficiency

Question 13

Consequences of price ceiling for stakeholders

Answer 13

Consumers - partly gain and partly lose as consumers who are able to buy the goof purchase it at a lower prices however some consumers remain unsatisfied since they cannot purchase the food
producers - worse off, as they sell a smaller quantity at lower prices and revenue drops
workers - fall in output means some workers likely to be fired, resulting in unemployment
government - no gains or losses for the government budget

Question 14

What is a price floor and draw the graph for it

Answer 14

A minimum price set above the equilibrium price, in order to produce income support to farmers or to increase wages of low-skilled workers

Question 15

price floor

Answer 15

government sets a minimum price above the equilibrium price, preventing producers from selling their product below it. This is done to protect producers, usually in the case of commodities and in the labour market.

Question 16

aims of price floors

Answer 16

to increase the income of producers of goods and services that the government considers important, such as agricultural products, which are subject to large price fluctuations or great foreign competition.

to protect workers, by setting a minimum wage that ensures they earn enough to have a reasonable standard of living.

Question 17

consequences of price floors

Answer 17

It produces surpluses.
It promotes the creation of black markets.
The government needs to dispose of the surplus.
It might create firm inefficiency.
It eliminates allocative efficiency and generates welfare loss.
There are consequences for market stakeholders.

Question 18

Consequences of price floor for stakeholders

Answer 18

Consumers - worse off as they pay a higher price

Producers - gain as they receive higher prices , and since goverment purchases surplus, revenue increases

Workers - likely gain as employment increases due to greater production

Government - lose, buying excess supply is a burden on budget

Question 19

Minimum prices generate a deadweight loss to society because

Answer 19

The government has to buy up the surplus from producers to achieve the aims of its policy.

Question 20

What is Indirect taxes and the graph for it

Answer 20

imposed on spending to buy goods and services

Question 21

Types of indirect taxes

Answer 21

excise taxes
Sales taxes

Question 22

aims of indirect taxes

Answer 22

collect government revenue.
discourage consumption of undesirable and/or dangerous goods.
redistribute income within the population.
correct negative externalities and socially inefficient allocation of resources.

Question 23

Types of excise taxes

Answer 23

specific tax
ad valorem taxes

Question 24

specific tax

Answer 24

fixed amount of tax per unit of the good or service sold

Question 25

ad valorem taxes

Answer 25

fixed percentage of the price of the good or service

Question 26

Consequences of indirect taxes for stakeholders

Answer 26

consumers - negatively affected due to higher prices
producers - negatively affected due to fall in price they receive and the fall in quantity the sell
the government - better off, as they earn revenue
workers - worse off, lower amount of output means fewer workers needed
society - worse off, due to underallocation of resources and decrease in social surplus

Question 27

where id the deadweight loss on a graph

Answer 27

Question 28

Subsidies

Answer 28

per-unit payments that are used to lower production costs and increase the output of the market

Question 29

aims of subsidies for the government are usually

Answer 29

to increase revenues of producers.
to make basic necessities and merit goods more affordable to low-income consumers.
to encourage the consumption of a good or service that is considered beneficial to consumers.
to support growth of a particular industry.
to encourage exports and protect national industry from foreign competition.
to correct positive externalities, improving the allocation of resources.

Question 30

What are subsidies and what does the graph look like

Answer 30

Assistance by the governments or individuals groups of individuals, such as firms, consumers, industries or sectors of an economy

Can take the from of direct cash payments or other forms of assistance such as low-interest loans

Question 31

Subsidy impacts on stakeholders

Answer 31

Consumers - pay lower prices, better off

Producers - better off, as they lower production costs

Goverment - worse off, subsidy is burden on its budget

Workers - better off, more labour needed to produce extra output

Society - worse off, over allocation of resources, protects inefficient frims